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Robert Mazur, the U.S. Customs special agent who led one of the most successful undercover operations in U.S. law enforcement history, gave us some insight into international money laundering and said the Federal Reserve needs to do more to help.

In the 1980s Mazur spent five years infiltrating the highest circles of Colombia’s drug cartels as a money launderer, transforming more than $34 million in cocaine cash into traceable, paper-trailed bank transactions under the pseudonym Bob L. Musella.

“What [the corrupt bankers at BCCI] did was market flight capital, and they identified it as basically money seeking secrecy from governments,” Mazur said. “Yes it does include the items that the $2.1 trillion identifies but it’s bigger than that because there are times that you take legal money and use it for an illegal purpose, and that money is as big if not bigger than the illegal money.”

He calls the practice “a major moneymaker for the banking world” and cites the Standard Chartered scandal, in which bankers “took $250 billion worth of basically legal money and used techniques to hide from governments the fact that the money was being moved in these otherwise-legal transactions on the behalf of sanctioned nations, including Iran.”

He said the HSBC ruling listed six or seven methods “traditionally used by banks in a big way facilitate relationships with people who want to hide money from governments” and explained that bankers provide these services “to entice these people to bank with them” so that the bank is able to increase their deposits.

Mazur said that banking regulators are “not as focused on the issue of criminal conduct as they are on … making sure that the institution itself stays healthy” so investigations take years and result in a lengthy report.

“There’s nothing built in the system to engage criminal investigations up front,” Mazur said.” They always come in a very rusty state after they’ve been played with by the regulators. By then everyone’s built in their plausible deniability and it’s a very difficult task to expect the investigators to then come up with the intent evidence,” which is essential for criminal prosecution.

He added that the current regulatory process ignores the fundamental problem, which is that “there are two brains in a bank—there’s this profit brain that’s motivated by earning money … and then we have a compliance department and their whole agenda has nothing to do with profit, it has to do with identifying risk and minimizing it. But when the compliance and the sales brain meet, upper management sides with sales because that’s their gig too—profits. And there has to be a way to try to begin to change that chemistry of the interaction of the two brains.”

One straightforward ways to do that, according to Mazur, would be to crack down on bankers who solicit shady business—like the ones at HSBC—by putting a few “behind bars for a very long period of time” instead of just giving them a fine.

Another simple way is to require the Federal Reserve to share information about member banks who are in the bulk bank note business. If regulators and prosecutors knew which institutions were moving much larger amounts of money through wire transfers (which the Fed tracks), they would know where to focus investigations or covert-type operations.

“You’re honing down all your information to go after, proactively, the institutions most involved in moving this type of money,” Mazur said. “It’s not complicated but the Federal Reserve doesn’t give that information out freely and that’s something that needs to change.”

He noted that concerned individuals in the military, law enforcement and intelligence community have accessed more of that information in the last 2 years than ever before, but emphasized that more has to be done.

“That’s one of the barriers that’s slowly crumbling, and it’s an important barrier to wind up crumbling, but it’s not completely accessed,” Mazur said.

The morning after the G-20 leaders endorsed the Financial Stability Board’s recommendations for a global system of precisely identifying legal entities, the co-chairwoman of the LEI Trade Association Group said, “I think we have something that is real and ready for use.’’

Robin Doyle, a senior vice president at JPMorgan Chase, noted that 20,000 ready-to-use “legal entity identifiers” have already been generated by a prototype jointly developed by the Depository Trust and Clearing Corporation and the Society for Worldwide Interbank Financial Telecommunication. A copy of that file can be downloaded here.

The online portal that would allow financial market participants to register and receive 20-character ID codes and to search for the codes of counterparties or other entities was demonstrated Wednesday morning at the 2012 Technology Leaders Forum of the Securities Industry and Financial Markets Association.

That portal can be turned live “within 24 hours” of its need, said Mark Davies, Vice President, Business Development at The Depository Trust & Clearing Corporation, during the demonstration.

The LEI Trade Association Group represents a group of firms and financial industry trade associations trying to develop a global and uniform legal entity identifier. The group is supported by the Global Financial Markets Association, which includes SIFMA.

SIFMA and a variety of other trade groups have recommended that DTCC and SWIFT operate a central authority for registering and issuing the codes that the leaders of the G-20 industrial nations Tuesday endorsed.

The G-20 endorsed the 35 recommendations of an international coordinator known as the Financial Stability Board.

The board’s recommendations differed in one significant aspect from the SIFMA and trade association recommendation. Where the trade groups recommended a centralized system for registering and issuing ID codes – a point reinforced Tuesdya in opening remarks at SIFMA Tech by SIFMA president T. Timothy Ryan Jr. – the FSB recommended a “federated” registration model. Under that approach, local authorities, aka nations, could and theoretically would act as the agencies for registration, issuing and storing the codes.

The central authority would maintain a database that would be logically managed, but whose contents might be spread around the world, as on servers spread across the Internet.

“We think it can work,” but it has to be set up and maintained properly, Doyle said.

The federated model will only be as good as it adheres to the global standards set by the FSB and the International Organization for Standardization, which defined the 20-character code.

Doyle said a central authority under the FSB approach likely will need to conduct audits of local operating units, to ensure compliance with the overall standards. The challenge will be to make sure the codes are kept correctly and not, in some fashion, duplicated.

The local authorities will need to take on the expense of maintaining high standards. “It is an expensive, difficult process to validate data,” Doyle said.

“A public-facing system like this needs a huge amount of control,” Davies said.

The next shoe to drop on the development of the system will come within the next couple weeks. That’s when Commodity Futures Trading Commission member Scott O’Malia said a decision will be announced on what organization or organizations will handle the registration and issuance of ID codes for the swaps markets it will oversee. O’Malia said at SIFMA Tech Tuesday that the decision among what industry executives say are four competing proposals will come “very soon.”

Srinivas Bangarbale, the CFTC’s Chief Data Officer, said Wednesday that the regulator’s “interim compliant identifier” will support the ISO 17442 standard set out by the FSB and ISO. r

It’s decision to move ahead “presupposed the standard” and that the chosen implementing group would “adopt the standards as published.” The CFTC will not directly or indirectly create another set of reference data for the industry to keep track of

“It’s important to use the standard as soon as possible,” he said, however.

O’Malia said the CFTC is likely to begin issuing IDs as early as September. That is so the commission can fulfill its mandate to oversee interest-rate and credit-default swap markets, as mandated by the 2010 Dodd-Frank Wall Street Reform Act.

The FSB’s implementation schedule calls for a functional system to be ready to use by March 2013.

Thomson Reuters has failed to appease EU antitrust bodies over proposed concessions in the way it licenses the proprietary Reuters Instrument Codes.

In 2009 the European Commission opened antitrust proceedings against Thomson Reuters over possible abuse of its dominant market position in the supply of RICs – codes that identify securities and are used by financial institutions to retrieve data from Thomson Reuters’ real-time feeds.The EC argued that the firm could be abusing its dominant position in the market for these consolidated real-time datafeeds by stopping customers from using RICs for retrieving data from alternative providers and mapping them for such a purpose to alternative symbols.

In an attempt to ward off further action by the Commission, the vendor agreed to let customers license RICs for mapping purposes over a five-year period for a monthly fee based on the number of RIC symbols to be used.

However, in a speech in Copenhagen today, EU competition chief Joaquín Almunia, said that a market test of the new measures had failed to deliver a desirable outcome.

“We have now reached a critical stage in this investigation,” said Almunia. “If no effective solution can be agreed upon, then we will have to draw the adequate conclusions.”

The company could face fines of up to 10% of its turnover if it does not offer further concessions to users.

Thomson Reuters’ rival Bloomberg has moved to make its own proprietary symbology available for free to developers and market practitioners.

A new system giving financial institutions standardized Legal Entity Identifiers (LEIs) will start to be phased in next year after an international organization finalizes new standards in January 2012.

The Geneva-based International Organization for Standardization (ISO) is expected to approve a plan for LEIs at the beginning of next year, calling for them to consist of 20 alphanumeric characters. After that happens, the infrastructure is already in place to start issuing the IDs early in 2012, according to officials with the Securities Industry and Financial Markets Association.

“Assuming the standard is approved by early January, our expectations are that legal entities will be able to register in short order for an LEI,” said Tom Price, managing director and head of SIFMA’s technology, operations and business continuity planning group.

During the financial crisis, both regulators and institutions realized they did not have the information available to quickly address issues of counterparty risk. LEIs aim to change that by using a universal code that would allow counterparties to be easily identified.

The United States has provided much of the leadership behind the push for LEIs, but the concept enjoys broad support around the globe. The registering authority for LEIs will not come from any government, but rather from the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

After the ISO finalizes the standard, the next step will be rule writing, which is already underway at the Commodity Futures Trading Commission with respect to swaps. Price said LEIs will be used first for swaps participants and then gradually adopted for transactions involving other types of assets until they are required for all trades.

David Strongin, who is also a managing director at SIFMA, said the U.S. will be the first country to require LEIs, but Hong Kong and Canada will likely follow fairly quickly. The European Union has committed to adopting LEIs as well, though it is unclear whether Europe will adopt the system all at once or phase it in country by country.

Strongin stressed, however, that there is a global consensus to move forward, even if not every nation and region mandates LEIs at the same time.

“The G20, both the finance ministers and leaders, have all endorsed this,” Strongin said. “From a very high level, you don’t see disagreement that an LEI is needed. I think everyone agrees that it’s an important tool to build the foundation for risk management.”

Strongin said that while many traders might not see it right now, most firms are currently working hard to prepare for LEIs. Eventually, however, the changes will touch every facet of the industry. “There’s a lot of work going on, though there’s only so much you can do until you see the final rules,” Price added.

Launch of the first stage of the BM&FBOVESPA PUMATrading System

BM&FBOVESPA announces the conclusion of the first stage of development and integrated tests with the market of its new trading platform, named the BM&FBOVESPA PUMA Trading System. This is a multi-asset electronic trading platform that has been developed by BM&FBOVESPA and CME Group. BM&FBOVESPA PUMA Trading System will replace the Global Trading System (GTS), Mega Bolsa, BOVESPA FIX and SISBEX, integrating them into a single system with greater processing capacity, extremely low latency, and new functions. The implementation will occur in stages:

The Exchange implemented the BM&FBOVESPA PUMA Trading System in the spot foreign exchange market on August 29, 2011. The other stages will be executed in the following weeks, at dates to be announced at an opportune moment. As part of the GTS replacement effort, instruments will migratein four-stages. At each stage, orders sent to the Exchange for these contracts will be processed exclusively by the new system. The migration stages are:

BM&FBOVESPA and BOVESPA Market Supervision (BSM), the Brazilian self-regulatory organization in charge of inspecting and supervising transactions and trade authorizations, announced on September 15 that they will use NASDAQ OMX’s SMARTS Integrity market surveillance platform to monitor trading across their equities and commodities platforms. Using SMARTS Integrity, BM&FBOVESPA and BSM will have a comprehensive portfolio of alert scenarios for market behavior.

BM&FBOVESPA and BNDES present new portfolio for the Carbon Efficient Index

BM&FBOVESPA and BNDES announced on September 5 the composition of the theoretical portfolio of the Carbon Efficient Index, valid from September to December 2011. The ICO2 is an index composed of stocks in IBrX-50 index companies that have accepted involvement in the initiative, adopting transparent practices as regards greenhouse gas emissions (GGEs). The calculation of shares in the ICO2 index takes into consideration the greenhouse gas emissions and free float of companies.

New head of BM&FBOVESPA for UK

BM&FBOVESPA announces that Sergio Gullo has been hired as the new chief representative for BM&FBOVESPA in London. He will report to BM&FBOVESPA International Business Development Officer Lucy Pamboukdjian and be responsible for operations with the European, Middle Eastern and African markets. Sergio Gullo has been active in the financial market for more than 27 years. He was Business Development Manager in the United Kingdom for BGC Partners and has worked in financial institutions such as Banco Votorantim and Renaissance Capital, specializing in emerging markets and always in commercial areas with a focus on fixed income and structured products. He also held a wide range of positions at Lloyd’s TSB Bank for 19 years, in both Brazil and the UK.

New office in London

The BM&FBOVESPA office in London has moved to One New Change, 4th floor (London, EC4M, 9AF, United Kingdom). The London office may be contacted by e-mail at sgullo@bvmf.com.br and by telephone at (+44) 203 379 3978.

BM&FBOVESPA (BVMF) and the Shenzhen Stock Exchange (SZSE) signed on September 26 a memorandum of understanding (MOU) which includes personnel exchange, mutual training and information and experience sharing. Ms Song Liping, President of the Shenzhen Stock Exchange, and Mr. Edemir Pinto, CEO of BM&FBOVESPA, signed the MOU last month during the 5th International, Financial and Capital Market Conference in Campos do Jordão, in the state of São Paulo.

BM&FBOVESPA’s options and capital raising activity

According to the WFE (World Federation of Exchanges), BM&FBOVESPA is ranked as #1 in volume of Stock Options contracts trades and #4 in IPOs (Capital Raised). These and other regulated exchange industry numbers are available at: http://www.world-exchanges.org/statistics

Securities Lending

In August, the total number of securities lending transactions reached a record 141,721 compared to the previous record of 121,971 in May 2011 and to 114,989 in July. Financial volume was BRL 62.63 billion in August from BRL 52.16 billion the previous month.

Ibovespa and other index portfolios, valid for September-December 2011

BM&FBOVESPA has announced the Ibovespa theoretical index portfolio, which will be valid from September 5 to December 29, 2011, based on the closing of the September 2, 2011 trading session. The new portfolio now includes common shares in BR Malls and Cia Hering, which brings its total to 68 stocks in 63 companies.

BM&FBOVESPA launches app for Google Chrome web browser

BM&FBOVESPA announced on September, 16th that users of the Google Chrome web browser can download a free app that allows real time monitoring of the share prices of companies traded on BM&FBOVESPA and of the directions taken by the main capital market indexes. This tool allows users to customize their share portfolio, storing in the “Favorites” tab the companies that they wish to monitor daily. The app includes films that explain stock investment, wealth creation, and financial education. It also contains messages that are sent to the BM&FBOVESPA twitter channel @Info_BMFBOVESPA

2011 EVENTS

Family Office Summit – Latin America

BM&FBOVESPA is currently sending invitations for this event promoted by the World Research Group and which will be held in São Paulo September 26-28. A BM&FBOVESPA representative is scheduled to talk about alternative investments. The summit will present current trends for optimizing effective strategies and alternative methods to produce investments for single and multi family offices in the Brazilian capital market. There will be a special networking session bringing together managers, single and multi family offices, advisors and consultants.

2nd FX Growth Markets Series: Brazil – Profit & Loss

BM&FBOVESPA will join the Profit & Loss FX Growth Markets conference on October 20, 2011 at the Tivoli Hotel in São Paulo. Profit & Loss has been operating its highly successful series of Forex Network and FX Growth Markets conferences for more than 10 years, with regular annual events held in London, New York, Chicago, Singapore, Brazil, Mexico, Colombia, Chile, Shanghai and Toronto, and comes to Brazil for the second time. A BM&FBOVESPA representative will talk at the event.

The World Cup of ETFs and Indexing Latin America

BM&FBOVESPA is lending its support to the World Research Group’s “World Cup of ETFs and Indexing Latin America.” The event aims at providing attendees with the best practices for ETFs use, as well as a comprehensive analysis of market structure, regulations and current and future opportunities. The expected audience includes pension funds, hedge fund managers and investors, investment advisors, financial consultants, and other market participants. A BM&FBOVESPA representative will talk about the Exchange’s ETF products.

In August, transactions carried out by foreign investors presented by CME to BVMF (who use the Globex-GTS order routing system or access BVMF markets via co-location) totaled 5,308,308 contracts traded, in 1,235,349 trades, compared to 2,897,744 contracts and 688,862 trades in July.

* Direct access to the BM&FBOVESPA market segments is carried out through DMA models 1, 2, 3 and 4. In model 1 or traditional DMA, the client accesses the GTS or Mega Bolsa through technological intermediation of a brokerage house. In model 2 or via DMA provider, the client does not use the technological intermediation of a brokerage house, but rather connects to the system through an authorized access provider. DMA via order routing with CME Globex is also a form of DMA model 2. In model 3, the client connects to the system through a direct connection. In model 4 or via co-location, the client installs its own computer within the Exchange’s facilities.

Notes:

The volumes registered by access modality include both buy and sell sides of a trade.

The volumes by access modality for both the BM&F and the BOVESPA market segments have been reported in a consolidated manner in the BM&FBOVESPA statements since May 2009.

MARKET RESULTS

BM&F Segment August 2011

Derivatives markets in the BM&F segment (including financial and commodities derivatives) totaled 78,606,873 contracts and BRL 5.23 trillion in volume in August, compared to 44,199,125 contracts and BRL 3.35 trillion in July. The daily average of contracts traded in the derivatives markets in August was 3,417,690, in contrast to 2,104,720 in July. Open interest contracts ended the last trading day of August with 37,821,302 positions, compared to 30,716,596 in July.

BOVESPA Segment August 2011

In August 2011, the equity markets (BOVESPA segment) financial volume totaled a record BRL 177.906 billion, in a record 16,234,673 trades, with daily averages of BRL 7.73 billion and a record 705,855 trades. This was in comparison to the prior total volume record of BRL 155.55 billion in October 2010, the prior total trades record of 11,172,707 in May 2011 and the prior daily average trades record of 544,88 in February 2011.

CME Group, the world’s leading and most diverse derivatives marketplace, and the Mexican Derivatives Exchange (MexDer), the derivatives subsidiary of the BMV Group and second largest exchange in Latin America, today announced the successful launch of their north-to-south order routing agreement, giving customers in the U.S. access to MexDer’s benchmark derivatives contracts, including Mexican Stock Exchange Index Futures, Bond Futures and MXN Peso / US Dollar Futures Contracts.

The first phase of CME Group’s strategic partnership with MexDer went live April 4, 2011 and gave Mexican investors access to CME Group’s benchmark derivatives contracts including interest rates, foreign currencies, equity indexes, energy, metals and agricultural commodities.

“Mexico is the 13th largest economy in the world and we continue to look for opportunities to provide our customers around the world with the broadest and most diverse range of globally-relevant products to help them manage their risk,” said Phupinder Gill, CME Group President. “This next phase of the partnership demonstrates how we continue to build on our successful track record of growing our business internationally through strategic partnerships.”

“With the successful launch of South-to-North order routing in April, the second phase of the direct order routing connection now makes it possible for both of our customers to leverage access to both MexDer and CME Group, and take advantage of a modern market with a friendly regulatory framework in Mexico and a growing sophisticated local investor base,” said Luis Tellez, Chairman and CEO of BMV Group. “Our goal moving forward is to focus on increasing our volumes together and working more closely with each other to learn how we can meet the needs of our customers.”

In March 2010, the parent company of MexDer, BMV Group, and CME Group entered into a strategic partnership that includes order routing for derivatives products as well as an agreement to pursue potential joint initiatives including product development, marketing and customer education as well as clearing opportunities. CME Group is the exclusive exchange provider of derivatives order routing services to MexDer outside Latin America, and MexDer is the exclusive exchange provider of derivatives order routing services to CME Group in Mexico.

Online trading has definitely come a long way in the past decade. Innovation and technology now allow you to follow and trade stocks from your phone or laptop, not to mention accessing advice and chart information at the same time. However, our new online powers have lulled us into a false sense of security in today’s high paced electronic world. The criminal element in our society is counting on that fact to ply their own online trade activity, that of deceiving you out of your hard earned cash.

Yes, the unscrupulous few among us had to spoil the fun for all investors. Does $400 billion a year in securities related fraud losses get your attention? The FBI believes it should, as does the SEC and CFTC. The Internet has been the great enabler of our times, providing access to mountains of information and a dizzying array of applications to bring convenience to our hectic lives. It also has brought anonymity, the cloak that hides the invisible swindler that may have tapped you as his next target of opportunity.

Does this mean that you should forgo buying an iPad and take a course in risk management instead? Of course not! Fraud mitigation starts and stops with you and your ability to be skeptical and use common sense. Here are a few suggestions to help you avoid the most common pitfalls for the average investor:

Business Partners: Fraudulent brokers have stolen millions from investors. Do your due diligence. There are many review services for checking banks and choosing the best stockbroker or best forex broker. Make sure your bank has a strong balance sheet, and that your broker is above board and onshore. Consult your banker or broker for investment advice on every investment deal.

Warning Signs: Some signs, though obvious, need repeating. Here are a few tell-tell signs:

Unsolicited offers should be questioned or avoided;

If it sounds too good to be true, it most likely is;

If there is little or no risk, then it isn’t for real;

If there is a sense of urgency, walk away;

Swindlers talk fast so you won’t ask questions;

If written explanations are not forthcoming, stop considering it;

If it sounds too complicated, don’t waste your time;

Con Artists always dress well to impress and deceive;

Ignore referrals from friends, until after doing your due diligence;

Be very skeptical when asked to send a check or wire funds.

Actual Scams Often Repeated:

The Ponzi Scheme: The swindler pays high returns from new client deposits to gain your trust and new referrals. He takes what is left. Bernie Madoff and Kenneth Starr are prime examples of the craft;

The “Pump-and-Dump”: Mass communication of rumors is used to pump up a stock’s value. The swindler unloads his shares at a huge profit only to leave unsuspecting Buyers holding the bag after the price plummets;

The “Tipster”: The Tipster calls 100 people, passing along a “tip” to gain confidence. He tells half that the stock will rise, and the other half that it will fall. The next day, he now has 50 “marks” that believe. He may continue his confidence game until he finally asks you for money. Be sure to walk the other way.

Investment fraud generally happens to those people who never expect it or are easily tempted by greed. Protect yourself by heeding these warning signs and being aware of the most typical scams that con artists love to use.

All kinds of proposals have been floated about creating an Asian bloc a la European Union. Bilateral and multilateral free trade agreements (FTA) have been suggested for various combinations of Asian countries. Lately, there’s been a flurry of new ideas as Japan’s recently installed DPJ government seeks to differentiate from the ousted LDP.

By promoting ideas that lean toward Asia, DPJ’s leadership is signaling that Japan wants less dependence on the United States. This position offers a hope for the future to Japanese people, whose economy has been comatose for two decades. Closer integration with Asian neighbors could restore growth in Japan.

Whenever global trade gets into trouble, Asian countries talk about regional cooperation as an alternative growth driver. But typically these talks die out as soon as global trade recovers. Today’s chatter is following the same old pattern, although this time global trade is not on track to recover to previous levels and sustain East Asia’s export model. Thus, some sort of regional integration is needed to revive regional growth.

Which regional organization is in a position to lead an integration movement? Certainly not ASEAN, which is too small, nor APEC, which is too big. Something more is needed – like a bloc rooted in a trade pact between Japan and China.

ASEAN’s members are 10 countries in Southeast Asia with a population exceeding 600 million and a combined GDP of US$ 1.5 trillion in 2008. The group embraced an FTA process called AFTA in 1992, which accelerated after the 1997-’98 Asian Financial Crisis and competition with China heated up. When AFTA began, few gave it much chance for success, given the region’s huge disparities in per capita income and economic systems. Today AFTA is almost a reality, which is certainly a miracle.

ASEAN has succeeded beyond its wildest dreams. These days China, Japan, and South Korea join annual meetings as dialogue partners, while the European Union and United States participate in regional forums and bilateral discussions.

China and ASEAN completed FTA negotiations last year, demonstrating that they can function as an economic bloc. Now, China is ASEAN’s third largest trading partner. Indeed, there is a great upside for economic cooperation between the two.

Before the Asian Financial Crisis, the ASEAN region was touted as a “miracle” by international financial institutions for maintaining high GDP growth rates for more than two decades. But some of that growth was built on a bubble that diverted business away from production and toward asset speculation. This developed after credit expansion, driven by the pegging of regional currencies to the U.S. dollar, encouraged land speculation. ASEAN’s emerging economies absorbed massive cross-border capital due to a weak dollar, which slumped after the Federal Reserve responded to a U.S. banking crisis in the early 1990s by maintaining low interest rates.

Back then, I visited companies in the region that produced goods for export. I found that, despite all the talk of miracles, many were making money on financial games — not business. At that time, China was building an export sector that had started exerting downward pressure on tradable goods prices. Instead of focusing on competitiveness, the region hid behind a financial bubble and postponed a resolution. Indeed, ASEAN’s GDP was higher than China’s before the Asian financial crunch; now China’s GDP is three times ASEAN’s.

China today faces challenges similar to those confronting ASEAN before the crisis. While visiting manufacturers in China, I’ve often been discovering that their profits come from property development, lending or outright speculation. While asset prices rise, these practices are effectively subsidizing manufacturing operations – an asset game that can work wonderfully in the short term, as the U.S. experience demonstrates. When property and stock markets are worth more than twice GDP, 20 percent appreciation would be equivalent to four years of business profits in a normal economy. You can’t blame businesses for shifting their attention to the asset game in a bubbly environment. Yet as they focus on finance rather than manufacturing, their competitiveness erodes. And you know where that leads.

I digress from the main focus for this article — regional integration, not China’s bubble challenge.

So let’s look again at ASEAN’s success. In part, this reflects its soft image: Other major players do not view ASEAN as a competitive threat. Rather, the FTA with China has put pressure on majors such as India and Japan to pursue their own FTAs with ASEAN. Another dimension is that the region’s annual meetings have become important occasions for representatives from China, Japan and South Korea to sit down together.

In contrast to ASEAN’s success, APEC has been an abject failure.
Today, it’s simply a photo opportunity for leaders of member countries from the Americas, Oceania, Russia and Asia. APEC was set up after the Soviet bloc collapsed, and served a psychological purpose during the post-Cold War transition. It was reassuring for the global community to see leaders of former enemy countries shaking hands.

However, APEC is just too big and diverse to provide a foundation for building a trade structure. So general is the scope that anything APEC members agree upon would probably pass the United Nations. Now, two decades after end of the Cold War, APEC has clearly outlived its usefulness and is withering, although it may never shut down. APEC’s annual summit still offers leaders of member countries a venue for meetings on the sidelines to discuss bilateral issues. Maybe the group is useful in this way, offering an efficient venue for multiple summits concurrently.

Although ASEAN has succeeded with its own agenda, and achieved considerable success in relation to non-member countries, it clearly cannot assume the same role as the European Union. Besides, should Asia have an EU-like organization? Asia, by definition, clearly cannot. It’s a geographic region that includes the sub-continent, Middle East and central Asia. Any organization that encompasses Asia as a whole would be as unwieldy as APEC.

I am always puzzled by the word “Asia,” which the Greeks coined. In his classic work Histories, it seems ancient Greek historian Herodotus primarily referred to Asia Minor — today’s Turkey, and perhaps Syria — as Asia. I haven’t read much Greek, but I don’t recall India being included in ancient Greek references. So as far as I can determine, there is no internal logic to treating Asia as a region. It seems to encompass all places that are neither European nor African. Africa is a coherent continent, and Europe has a shared cultural past. Asia belongs to neither, so it shouldn’t be considered an organic entity.

Malaysia’s former prime minister Tun Mahathir bin Mohamad Mahathir was a strong supporter of an East Asia Economic Caucus (EAEC) which would have been comprised of ASEAN nations plus China, Japan and South Korea. But because Japan refused to participate in an organization that excluded the United States, the idea failed.

Yet there is some logic to Mahathir’s proposal. East Asia has a shared history, and intra-regional trade goes back centuries. Population movements have been significant, and as tourism takes off, regional relations should strengthen. One could envision a future marked by free-flowing capital, goods and labor in the region.

Yet differences among the region’s countries are much greater than in Europe. ASEAN’s overall per capita income is US$ 2,000, while it’s US$ 3,500 in China and US$ 40,000 in Japan. China, Japan, South Korea and Vietnam share Confucianism and Mahayana Buddhism, while most Southeast Asian countries embrace Islam or Hinayana Buddhism, and generally are more religious. I think an EU-like organization in East Asia would be very hard to establish, but something less restrictive would be possible.

Because Japan turned down Mahathir’s EAEC idea, there was a lot of interest when recently elected Prime Minister Yukio Hatoyama’s proposed something similar – an East Asia Community — at a recent ASEAN summit. Hatoyama failed to clarify the role of the United States in any such organization. If the United States is included, it would not fly, as it would be too similar to APEC. Nor could such an organization be like the EU. But if Japan is fully committed, the new group could assume substance over time.

The Japanese probably proposed the community idea for domestic political reasons. Yet the fundamental case for Japan to increase integration with the rest of Asia and away from the United States grows stronger every day. Despite high per capita income, Japan remains an export-oriented economy, having missed an opportunity to develop a consumption-led economy in the 1980s and ’90s. In the foolish belief that rising property prices would spread wealth beyond the industrial heartland in the Tokyo-Osaka corridor, the government of former Prime Minister Kakuei Tanaka pursued a high-price land policy, discouraging the middle class from pursuing a consumer lifestyle as they saved for property purchases.

Even more seriously, high property prices have been a major reason for Japan’s rapidly declining birth rate, as land prices inflated living costs. Now, facing a declining population and public debt twice GDP, Japan has few options for rejuvenating the economy by promoting domestic demand. It needs trade if it hopes to achieve any growth at all. Without growth, Japan will sooner or later suffer a public debt crisis.

Japan’s property experience offers a major lesson for China. Every Chinese city is copying the Hong Kong model — raising money from an increasingly expensive land market to fund urban development, leading to rapid urbanization. But this is borrowing growth from the future. Rising land prices lead to rising costs and, hence, slower growth and the same rapid decline in the birth rate that Japan experienced. Unless China reverses its high-land price policy, the consequences will be even more disastrous than in Japan or Hong Kong, as China shifted to the asset game much earlier in its development.

Yet I digress again. The point is that Japan has a strong and genuine case that favors more integration with East Asia. The United States is unlikely to recover soon and with enough strength to feed Japan’s export machine again. There is no more room for fiscal stimulus. Devaluing the yen to gain market share is not an option as long as Washington pursues a weak dollar policy. Without a new source of trade, Japan’s economy is doomed. Closer integration with East Asia is the only way out.

In addition to Hatoyama’s EAC proposal, a study jointly sponsored by China, Japan and South Korea is considering the possibility of a FTA. Of course, ASEAN could offer a template for any new East Asian bloc. ASEAN has signed an FTA with China and is talking with Japan and South Korea. If they all sign, regional integration would be halfway completed.

Whatever proposals for East Asian integration, the key issue is a possible FTA between China and Japan. Adding other parties avoids this main issue. China and Japan together are six times ASEAN’s size and 10 times South Korea’s. Without a China-Japan FTA, no combination in East Asia would truly support regional integration.

Five years ago, I wrote an op-ed piece for the Financial Times entitled China and Japan: Natural Partners. At the time, a prevailing sentiment was that China and Japan were antithetical: Both were still manufacturing export-led economies and could only gain at the other’s expense. I saw complementary demographics and capital: Japan had a declining labor force and China needed to employ tens of millions of youths migrating to cities from the countryside. China needed capital and Japan had surplus capital. And their trade relations indeed tightened, as Japan had increased the Chinese share of its overall trade to 17.4 percent in 2008 from 10.4 percent in ’04.

Today, the situation has changed. China has a capital surplus rather than a shortage. Demographic complementarity is still good and could last another decade. As China shifts its development model from resource intensive to environmentally friendly, a new complementarity is emerging. Japan has already made the transition, and its technologies that supported the transition need a new market such as China’s. So even without a new trade agreement, bilateral trade will continue growing.

An FTA between China and Japan would significantly accelerate their trade, resulting in an efficiency gain of more than US$ 1 trillion. Japan’s aging population lends urgency to increasing the investment returns. On the other hand, as China prepares to make a numerical commitment to limiting greenhouse gas emissions at the upcoming Copenhagen summit on global warming, heavy investment and rapid restructuring are needed for its economy. Japanese technology could come in quite handy.

More importantly, a China-Japan FTA would lay a foundation for an East Asian free trade bloc. The region has a population of 2.1 billion and a GDP of US$ 13 trillion, rivaling the European Union and United States. Blessed with a low base, plenty of capital, sound technology and a huge market, the region’s GDP could easily double in a decade.

Trade and technology are twin engines of growth and prosperity. No boom is sustained without one or the other. And when they come together, the boom can be massive. Prosperity seen over the past decade, for example, is due to information technology along with the opening up of China and other former planned economies. But these factors have been absorbed, forcing the world to find another engine. An integration of East Asian economies would be significant enough to play this role.

The best approach would be for China and Japan to negotiate a comprehensive FTA that encompasses free-flowing goods, services and capital. This task may appear too difficult, but recent changes have made it possible. The two countries should give it a try.

It would be wrong to begin by working out an FTA that includes China, Japan and South Korea. That would triple the task’s level of difficulty, especially since South Korea doesn’t have a meaningful FTA with any country. To imagine that the Seoul government would cut a deal with China or Japan is naive. China and Japan should negotiate bilaterally.

A key issue is that China and Japan should put economics before politics. If the DPJ government wants to gain popularity by increasing international influence rather than boosting the economy, then all the current speculation and discussion about an East Asia bloc would be for nothing. But if DPJ wants to sustain power by rejuvenating Japan’s moribund economy, chances for a deal are good.

While Japan is talking, China should be doing. China should aggressively initiate the FTA process with Japan. Regardless of China’s current difficulties, its growth potential and vast market are what Japan will never have at home nor anywhere else. Hence, China would be able to compromise from a position of strength.

Some may say a free trade area for East Asia is beyond reach. However, history belongs to the daring. The world has changed enough to make it possible. China and Japan should seize the opportunity.

The lesson from the ChiNext launch is as old as China’s stock market: Too much regulatory protection leads to speculation.

(Caijing Magazine) China’s growth enterprise board ChiNext recently opened after 10 years in the making. Hopes ran high, and trading sizzled. But the debut quickly led to disappointment, recalling the now-sputtering Shenzhen SME board, which began with a dramatic flash but eventually cast a pall over growth stock trading.

But it was a flash in the pan, unchecked by regulator warnings and a fat book of regulatory measures designed to prevent speculation. Within a few days, prices tumbled. Suddenly, ChiNext was nothing more than a new game in town that pulled players into the same kind of mania seen a couple of years ago when PetroChina A-shares reached the stratosphere in an IPO and when stock warrants had manipulated, rollercoaster price changes. Moreover, some of the 28 newly tradable companies became subjects of critical media stories about instant wealth, overselling of pre-IPO shares by management, and cases of cooking the books.

How did this newborn trading platform, so carefully planned and nurtured through a long gestation, fall captive to the old, genetic flaws of China’s stock markets? A crucial factor was excessive protection.

A successful growth enterprise board is not just a capital-raising platform; start-ups are far more valuable than blue chips in many ways. ChiNext was designed to encourage start-ups and new technology companies. It should be in a position to help traders pan for gold and turn ugly ducklings into swans.

But ChiNext was never given enough room to let the market play its resource allocation role. In the first place, IPOs for ChiNext still had to go through a government authorization process. Each of the 28 companies was chosen by regulators from among hundreds of applicants. This review process, which is based on company documents provided to the government rather than through public information disclosure, may look like accountability in the eyes of investors. But it actually restricts market selectivity.

The selection process was designed to signal that each of the 28 companies had a good chance for survival. So after giving permission to this first batch of companies for board trading, regulators suspended review of new applications for a month and concentrated on the ChiNext launch. Media euphoria and promotion activity by energetic brokers further diluted any sense of risk awareness among the trading public.

Yet such artificial control of supply and demand distorts the market. And this is nothing new. Past experience has shown that it’s futile in such circumstances to prevent volatility through regulation and investor warnings following an application process.

Moreover, speculation fire was fanned by murky delisting requirements. Regulations covering growth enterprise stocks on the Shenzhen Stock Exchange, which sponsors ChiNext, say companies should be warned before being delisted. The exchange, however, can rescind a warning if a company implements a “restructuring plan.” This means that, despite the rule for delisting start-ups, the exchange still leaves a back door open to creating shell companies – and attracting punters – by allowing restructuring. Such loose market conditions help whip up speculative frenzy.

Of course, conditions are similar on the A-share main board. Excessive protection stems from a regulatory intent to list quality companies and inject vitality into the market. And in the area of delisting, strict enforcement is out of the question because regulators feel compelled to bow to public sentiment and give any shaky company another chance in the name of investor protection.

However, this protection oversteps the bounds and chokes market vitality. It will surely backfire. Regulators have created conditions for rent-seeking by listed companies, which then turns investors into speculators.

Success for ChiNext should depend on several big-picture factors including growth potential, investment environment and rule of law in society. Regulators can not and should not guarantee financial results and return on investment; they should not set goals for market size and trading volume. Otherwise, even perfect schemes would be hijacked by powerful interests under the banner of protecting investor interests.

Ensuring healthy development of the market is the duty of the China Securities Regulatory Commission as well as stock exchange operators. But their jobs should focus on making and implementing rules, not making market choices. They should concern themselves with improving the trading system, watching interest groups, ensuring adequate information disclosure, penalizing offenders, and educating investors. These tasks, ranging from the minute to critical issues for certain interest groups, can be easily overlooked. They should not.

In the international arena, successful growth enterprise boards are rare and their development paths are strewn with obstacles. China, as the world’s largest emerging economy, has no shortage of innovative ideas. And the market is active indeed. What China lacks, however, is a system that ensures healthy market function. The less-than-perfect inauguration of ChiNext should sound an alarm for regulators. It is not too late to take corrective action.

Investors have at last decided to look around them. The strong rally of the markets in 2009 seems to have ended, or at least to have entered into a short-term profit-taking period, while waiting for data that justifies a new advance to 100 k points. The conclusion that the recent rally was stronger than the economic numbers justify seems to have given the tone to the last few trading days in October and should continue so into the first few days of November. Download: Brazil – Monthly Allocation – November 2009

Fear for the future of the US economy is prevalent both there and here: and not without cause. The American economy remains the world’s motor and, if it reduces speed, the rest of the world’s economies will follow. The US recession ended with a GDP growth of 3.5% in 3Q09, above the most optimistic forecasts. The fear now is that the Government is removing the help that allowed this strong growth and that the economy does not have the strength to continue to expand without it and may even contract in the next quarters. Concerns about inflation also increase, which will certainly lead to interest rates going up, with a consequent reduction in the capital invested in emerging countries.

In Brazil, the elections begin to call the attention of investors. The movements intended to strengthen candidates do not always produce the results expected. Alliances begin forming but, for now, we do not even know who will be the candidates.

Waiting would have given better resultsWorrying about the cost to Brazil of an expensive Real, the Government attempted to halt its appreciation. If it had waited a few more days, the market would have taken care of the problem itself. The strong sales of the last few days, and the return of these resources to their country of origin, led to the depreciation of the Real that the 2% tax on the entrance of capital did not manage to achieve. Some believe that the implementation of the IOF is an attempt to garner income and balance the Government’s accounts. If this is so, the new tax will remain in place for some time.

Shares from the domestic market should outperformWith the end of reduced IPI on the sale of vehicles, with it remaining only on the sale of white line products, we believe that the steel market has leveled and focus now shifts to the mining market. Therefore, this month we opt for a greater concentration of companies that focus on the mining sector, as well as continuing to prefer stocks in companies linked to the domestic economy.

Outperforming the Ibovespa – Recommended Portfolio (“LONG”)Stock – Catalyst/fundamental
BRTP4 – greatest potential to appreciate
CTAX3 – good results in the 3Q09 lead to positive expectation in coming quarters
CSNA3 – increase in the sale of minerals from Namisa to China
EQTL3 – pure distributor that should have a dividend yield of at least 10%
ITUB4 – expected continuity of good results posted in the 3Q09
JHSF3 – one of the cheapest plays in the sector
LIGT3 – discounted in relation to its peers
LAME4 – increase in sales with the arrival of Christmas
MMXM3 – beginning of iron ore price negotiations
PCAR5 – of the retailers, it benefits the most from the maintenance of the IPI
PETR4 – pre-salt regulations
VALE5 – increase in fines and pellets sales

Short suggestion for NovemberBRML3 – price pressure due to sale of important stake
HYPE3 – price pressure due to sale of important stake

In a speech at the Sifma annual conference, SEC chairman Mary Schapiro told delegates that the regulator is drafting a proposal on sponsored access, focussing on arrangements that enable unfiltered access by non-regulated entities – in many cases, high frequency traders – to exchange systems.

“I liken it to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied,” says Schapiro.

She argues that broker-dealers act as gatekeepers, maintaining the integrity of markets and that this should not be sacrificed “to give a trader a millisecond advantage”.

Schapiro has also asked SEC staff to find ways to shed light on high frequency traders, who now account for more than 50% of volume.

“I believe we need a deeper understanding of the strategies and activities of high frequency traders and the potential impact on our markets and investors of so many transactions occurring so quickly. And we need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated,” she says.

In addition, the watchdog expects to seek public comment on co-location – the process where exchanges allow some broker-dealers to place their servers close to the matching engine of the bourse. Shapiro is worried that this offers “significant advantages” for traders who rely on speed.

The SEC has already proposed a ban on flash trading – which gives some investors a sneak peak at open order before the wider market – and last week made three specific proposals aimed at strengthening the regulation of dark pools.

Meanwhile, with the use of dark pools and high frequency trading under intense scrutiny, Goldman Sachs – which runs the Sigma-X platform – has been defending the practices to the SEC.

In a recent memo to the watchdog, the investment bank says dark pools “are a technological evolution of classic market structure that have brought benefits to institutional and retail trading alike”.

Fluctuating currency values can make or break foreign exchange traders. On a far wider scale, they affect global economic balance.

(Caijing Magazine) Anyone who has read the Chinese bestseller Currency Wars by Song Hongbing knows about the conspiracy theory that says currencies can be used as instruments of war. As one who witnessed the turmoil among Asian currencies during the 1998 Asian financial crisis, I can confirm that currency speculation can be highly profitable for some traders in over-the-counter and thinly regulated markets.

Even today, I would not encourage anyone to take up foreign exchange trading. Accumulator products that bet on currency volatility are famously called “I’ll kill you later” with good reason: You might never have enough collateral to pay for margin calls, and your counter-party actually has the option to foreclose and crystallize your losses. Read contracts very carefully and make sure a contract seller discloses how much collateral you have to pay when prices hit certain levels.

As far as I am aware, no central bank has yet been able to launch regulatory cases against insider trading or market manipulation involving currencies. That’s because currencies are traded in pairs. Unless both central banks and/or financial regulators overseeing a pair of traded currencies are willing to help with an investigation, it’s unlikely that any investigation targeting market manipulation in this area would succeed.

However, the current financial crisis has convinced financial regulators around the world that naked short-selling during a crisis can have harmful effects, and that markets are not as innocent as free market fundamentalists claim.

The trouble with foreign exchange markets is that a mouse in a large market can be an elephant in a small market, so that a large speculator (or group of them) can move prices fairly quickly unless central banks supervising these markets are willing to cooperate to stop market manipulation activities. Until recently, major central banks tended to shun market intervention.

Yet the importance of currency values exceeds the forex trading sphere. I was reminded of this while returning from a think-tank conference in New Delhi recently, when it came to my attention that global imbalance is once again a hot topic. Some are again trying to blame Asia for saving too much money, claiming Asian saving habits caused the current crisis. It’s the same excuse we hear when a banker blames his non-performing loans on depositors who save too much.

Anyone interested in the technical issues of global imbalance should read the famous debate between Stanford University Professor Ron McKinnon and Michael Mussa, former chief economist at the International Monetary Fund, published by the Bank of International Settlements Working Papers (http://www.bis.org/publ/work277.htm). McKinnon argued China should maintain stable exchange rates to anchor monetary policy while concentrating on fiscal policy to deal with its balance of payment surpluses. Mussa, on the other hand, argued that a revaluation of the yuan is necessary for an adjustment that steers the world away from global imbalance.

The debate turns on the question of whether the U.S. current account deficit is structural and can be resolved through devaluation. By definition, conventional economic theory assumes this means non-U.S. currencies should revaluate. Proponents of this line of thinking, therefore, think Asian currencies should be revalued significantly.

As Nomura Chief Economist Richard Koo argues quite convincingly in his new book The Holy Grail of Macroeconomics – Lessons from Japan’s Great Recession, the Japanese crisis and the current crisis can be described as balance sheet recessions. The trouble with the flexible exchange rate argument is that the Japanese yen has revalued significantly, with hardly any effect on the U.S. current account deficit, implying there are structural reasons for the deficit that must be dealt with through fiscal and non-monetary policy measures.

This comes back to the Triffin Dilemma, which explains why a reserve currency country faces a conflict between its domestic monetary policy and global liquidity needs. If a reserve currency country tightens monetary policy, large capital inflows will negate monetary tightening policy moves. Raising interest rates will make exchange rates stronger and encourage more imports. It’s a contradiction that says the stronger the dominant reserve currency, the stronger is global growth. But the larger the deficit, the less sustainable is the situation.

So in a globalized world of free-flowing capital, a reserve currency country’s monetary policy is largely ineffective. When that country is unwilling to adopt a tight fiscal policy, a current account deficit is a consequence. So why should the blame fall on foreigners who have no say in a reserve currency country’s policy decisions?

This is why Nobel laureate Robert Mundell and others have argued that we should have a single, global reserve currency to replace the current use of four, major reserve currencies in the SDR, in which with the U.S. dollar accounts for roughly 66 percent, euro 25 percent, pound 5 percent and yen 4 percent. A single, global reserve currency would mean the world would become one currency area. This would prevent nations from quarrelling about trade deficits, just as California does not fuss over a deficit or surplus with Texas.

However, since it is unlikely that any sovereign nation will be willing to cede power to a global central bank, a global financial regulator and a global taxation regime that taxes winners and compensates losers, that goal is many years away.

The current recession has already shrunk the U.S. current account deficit to 3 percent of GDP, but the funding requirements of the growing fiscal deficit are rising. This is where Koo’s book is quite helpful in explaining how complicated the world has become, since the Japanese experience shows that a balance sheet recession throws conventional economic theory out the window.

I am convinced that conventional theory has put too much emphasis on the monetary and financial side of the analysis, and not enough on what is happening to the real, structural side of the world’s economies.

Andrew Shen is a guest economist of Caijing and former Chairman of Hong Kong Securities and Futures Commission.

The US Securities and Exchange Commission has unveiled proposals aimed at shedding more light on dark pool trading by introducing new rules that would require enhanced public disclosure of stocks passing over alternative trading networks.

At an open meeting in Washington, the Commission is presenting three specific measures aimed at strengthening the regulation of dark pools and increasing market transparency.

The first proposal would require actionable indications of interest (IOIs) to be treated like other quotes and subject to the same disclosure rules. The SEC is also proposing to lower the trading volume threshold applicable for displaying best-priced orders in a particular stock from the current five per cent level to 0.25%. A third proposal on the table would amend existing rules to require real-time disclosure of the identity of the dark pool that executed the trade.

Introducing the proposals, SEC chairman Mary Schapiro says: “Although dark liquidity always has existed in one form or another in the equity markets, the Commission must assure that the public markets and non-public trading venues operate within a balanced regulatory framework.”

The SEC has already said that it intends to ban flash trading – which gives some investors a sneak peak at open order before the wider market – and undertake a review of high frequency trading practices, including co0location and direct market access.

The latest move comes as Greenwich Associates releases research which implies that institutional investors are deeply divided over the merits or otherwise of high frequency trading strategies. Much of the support for further regulation is centred around the use of flash orders and indications of interest that are widely seen as elements of front-running.

However, interviews with 78 institutional investors in Canada, the US and Europe found that even some of the most active institutional stock traders cannot agree about whether high-frequency trading helps or hurts institutions, retail investors and the companies with publicly trading stock.

Forty-five percent of participating institutions think high-frequency trading poses a threat to the current market structure, while 36% believe it actually benefits the market and investors by increasing overall liquidity. However, almost 20% of institutions say they do not know enough about high-frequency trading to make a judgment about its overall impact on the market, much less on specific stock prices.

“Institutions are even split about whether high-frequency trading helps or hurts their own trading operations and outcomes,” says Greenwich principal Jay Bennett.

Until these questions are answered, regulators should limit any new rules to narrow trading practices that have an obvious and proven negative impact on investors, he says.

“More specifically, we would urge the SEC to commission an academic study on the short-term and mid-term effects of high-frequency trading on a company’s stock: opinion is evenly divided as to prospective benefits vs. negatives, with fully half of institutional investors claiming uncertainty.”